Terror wave adds to fears for fragile Turkish economy

Days after a suspected Islamic State jihadist blew himself up on a top shopping street in Istanbul, hotels, restaurants and retailers in the city are counting their losses.

Shops and restaurants on Istiklal Street, the usually bustling two-kilometre-long pedestrian artery targeted in the March 19 attack, complain of a sharp drop in business since the bombing, which killed four foreigners and injured dozens.

The attack on Istiklal — the beating heart of Turkey’s biggest city — emphasised the security threat after three deadly suicide attacks in the capital Ankara.

While financial markets have so far reacted with relative sangfroid to the terror wave, analysts say the bloodshed is putting strain on Turkey which is already battling high inflation and mid-term economic uncertainty.

“There could be large economic costs from these attacks, particularly in terms of long-investment and the tourism sector,” William Jackson, senior emerging markets economist at Capital Economics in London, told AFP.

– Tourism hit –

Western tourist numbers have slowed since Turkey began to come under sustained attack from IS jihadists and Kurdish rebels last July.

The industry’s headaches worsened when Turkey shot down a Russian jet on its border with Syria in November, nearly eradicating the key annual influx of Russian tourists.

Hikmet Eraslan, chairman of the upmarket Dosso Dossi hotel chain in Istanbul, told AFP he had been forced to halve room prices to try attract visitors.

“We had to let people go to reduce costs. What else can you do? We have to live,” Eraslan said.

The recently renovated Golden Age hotel, which lies just a few minutes walk from the scene of Saturday’s blast, is also struggling to fill its 180 rooms, only half of which were occupied this week, mainly by Iranians celebrating Persian New Year.

“Our general manager just came back from (the International Tourism Trade Fair) in Berlin. He said no-one wanted to come to Turkey,” an employee told AFP, speaking on condition of anonymity.

Inan Demir, an analyst at Turkey’s Finansbank, said he expected tourism revenue to drop under 17 billion dollars in 2016, down from 21 billion in 2015 (3 percent of GDP), worsening Turkey’s already gaping current account deficit and adding to unemployment of over 10 percent.

Foreign arrivals in January were already down 20-percent year-on-year.

– Investor confidence shaken –

Foreign investors, too, are likely to be “much warier about coming to Turkey, both physically and in terms of their portfolio allocations,” Demir said, predicting “a significant adverse shock to the Turkish economy”.

Further tarnishing the image of the country of 78 million are concerns over the alleged authoritarian drift of President Recep Tayyip Erdogan.

In dramatic scenes earlier this month, the authorities seized Zaman, a opposition newspaper linked to Erdogan’s arch-enemy the exiled cleric Fethullah Gulen while the military is battling the rebel Kurdistan Workers Party (PKK) in the southeast.

Capital Economics’ Jackson said the crackdown was likely to further dent already declining levels of foreign investment.

“When business and legal decisions appear to be politically motivated it is obviously very concerning for foreign investors because it creates uncertainty,” he said.

Yet the economy has also showed signs of resilience, with energy importer Turkey helped by the persistently low price of oil and gas.

Industrial production surprised to the upside with a 5.6 percent increase in January, while economic confidence rose in March after a three-month decline.

But there are many pitfalls ahead and Finansbank’s Demir said he believed investors would be closely watching who replaces Turkey’s respect outgoing central bank governor Erdem Basci when his term expires next month.

Erdogan has repeatedly called for interest rates to be lowered, ignoring economists’ calls for rates to be hiked to rein in inflation which stood at 8.8 percent in February.

Amplifying the concerns of markets, the bank pruned a key interest rate by 25 basis points at its latest monetary policy meeting.

For Demir, the bank’s failure to raise rates “is illustrative of the impact of politics on macro-economic policy making in Turkey”.

The choice of new governor would be a key test of the bank’s independence, he said, warning that appointing someone who “plays to the tune of Erdogan’s advisors” would likely “change investor sentiment for the worse.”